Ulster Bank has fired the first salvo in the battle by domestic institutions to retain depositors by introducing an interest rate of 4.2 per cent on instant access deposits of more than £1,000 (€1,270). The rate is higher than the 4 per cent interest rate offered by the Britishbank Northern Rock to Irish savers this week and will increase pressure on all Irish financial institutions to raise deposit rates.

Announcing the new rate yesterday, Mr John McNally, chief executive of Ulster Bank retail said it was being introduced as part of a strategy to increase the bank's customer base. "We want more deposits and once we get new customers on board they may consider other Ulster Bank products."

Consumers can avail of the new rate once they have more than £1,000 to put on deposit. Withdrawals can be made on demand either from an Ulster Bank branch or through its ATM outlets. The bank has not guaranteed how long the 4.2 per cent rate of interest will be offered. Mr McNally said this would depend on the response it received from consumers. "If we get a decent response it won't be withdrawn."

The Consumers' Association of Ireland, which has welcomed Northern Rock's presence here as providing greater choice and value for consumers, has stressed to depositors that Ulster Bank's 4.2 per cent rate of interest is not guaranteed.

Ulster Bank's move comes just a few days after Northern Rock introduced its 4 per cent rate on demand deposit accounts in the Irish market. Its direct saver account allows customers to deposit and withdraw funds through the post, by telephone or fax and over the Internet. Withdrawals should take up to four working days. The British bank has guaranteed to maintain its interest rate one percentage point ahead of euro-zone base rates until January 1st, 2001 and pledges to match ECB rates until 2002.

Before Northern Rock's arrival, customers with ordinary demand deposit accounts were being offered around 0.1 of a percentage point in interest and that was normally only paid on funds of more than £3,000. To get a rate of 4 per cent, depositors had to have at least £10,000 and had to be prepared to leave their money with the institution for more than one year.

The banks and building societies have attempted to play down the impact of Northern Rock's savings account on their customer base but will now be forced to reconsider the rates of interest they offer on demand deposit accounts.

AIB and Bank of Ireland pointed to the recent rise in ECB rates which will mean increases of between 0.25 and 0.75 of a percentage point in deposit rates depending on the type of account held. The financial institutions are also stressing they are not interested in growing the demand deposit rate, highlighting the higher earning options that are available to their customers once they are willing to put funds on deposit for a fixed period.

Just whether they decide to compete head on with Ulster Bank and Northern Rock will now depend on how popular the new rate proves to be with the public.